By: Thomas S. Tripodianos Published: January 2010

Does equitable subrogation apply or did the second mortgage cease to be a valid lien so that it may be canceled as a cloud on title?

Question. Second Mortgage Bank seeks to foreclose on a second mortgage, arguing the conveyance of the premises from Owners to Buyers was void. Buyer and Buyer’s Bank seek to vacate and remove Second Mortgage Bank’s mortgage from the public records. Buyer argues Owner never informed him of the existence of the second mortgage (i.e. lack of actual notice) and point to an undisputed error in indexing to prove they were not on constructive notice. Second Mortgage Bank argued it was entitled to equitable subrogation, contending its predecessor in interest, paid off and satisfied at least $78,275 of prior liens. Does equitable subrogation apply or did the second mortgage cease to be a valid lien so that it may be canceled as a cloud on title?

Answer. NO Equitable subrogation does not apply. The second mortgage ceased to be a valid lien. The Second Mortgage may be canceled as a cloud on title.

On June 2, the Owner purchased the subject real property and their deed to the premises was recorded on June 16 with the proper tax map designation. The Owner made this purchase using a $96,000 loan giving in return a mortgage on the premises. The mortgage through a series of transactions was eventually assigned to Second Mortgage Bank. The assignment was recorded twenty eight years after the mortgage loan was originally made.

In year 16 Owner, as borrower, executed a note with Second Mortgage Bank, for $152,000. To secure this loan, the Owner executed a $152,000 mortgage on the premises in favor of Second Mortgage Bank. The Second Mortgage was recorded in March in year 17, but with the incorrect lot designation.

In June, a year later, Buyer purchased the premises from the Owner for $225,000, taking out a loan from Buyers’ Bank for $202,000, and giving in exchange a mortgage on the premises for that amount (Mortgage Three).

In August of year 23, Second Mortgage Bank sought to foreclose on Mortgage Two. Buyer and Buyer’s Bank, assert improper indexing of Mortgage Two and seek to vacate and remove Mortgage Two from record. Second Mortgage Bank replies that the conveyance of the premises from the Owner to Buyer is void, being a fraudulent conveyance for the purpose of avoiding claims and liens of creditors, including those of Second Mortgage Bank and its predecessors in interest, and that Second Mortgage Bank is entitled to equitable subrogation.

Buyer states that the Owner never informed him of the existence of Mortgage Two, and that he lacked actual notice of Mortgage Two. Buyer’s Bank, states Buyer’s Bank had no actual notice of Mortgage Two at the time it loaned the funds to Buyer to purchase the premises from the Owner.

The unchallenged claim of Buyer and Buyer’s Bank are proof that they were not on actual notice of Mortgage Two, and the undisputed error in indexing proves they were not on constructive notice, either. Buyers and Buyer’s Bank have, thus, established entitlement to judgment as a matter of law (see Real Property Law §291).

Second Mortgage Bank asserts, in opposition, that it is entitled to equitable subrogation. The doctrine of equitable subrogation applies where the funds of a mortgagee are used to satisfy the lien of an existing, known encumbrance when, unbeknown to the mortgagee, another lien on the property exists which is senior to his but junior to the one satisfied with his funds. In order to avoid the unjust enrichment of the intervening, unknown lienor, the mortgagee is entitled to be subrogated to the rights of the senior encumbrance.

Second Mortgage Bank states that it paid off and satisfied at least $78,274.50 of prior liens on the premises in year 23. At the time these payments were made, Mortgage Three (year 24) did not yet exist. Equitable subrogation, thus, does not apply in this case. Moreover, Second Mortgage Bank did not become the assignee of Mortgage Two until year 28, the date of the assignment from Accredited, and, thus, was on notice of Mortgage Three, which had been recorded in year 27, and which should have led Second Mortgage Bank to conduct further inquiry.

As Mortgage Two has ceased to be a valid lien on the premises, it may be canceled as a cloud on title.

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